How do I build capabilities during a merger to drive successful integration?

Transcription

1 Insights into organization How do I build capabilities during a merger to drive successful integration? Sabine Cosack Arne Gast Julie Lovett Stefaan Rodts

2 How do I build our capabilities during a merger to drive successful integration? 1 Why is this important? Despite the decline in M&A activity during the downturn, the role of transactions in corporate growth remains critical. Successful growth companies view M&A activity as an opportunity for transformation and derive as much as 30 to 50 percent of their growth from transactions. 1 Indeed, strong integration capabilities are emerging as a critical element in long-term corporate health. With integration come pressures, uncertainties, and looming deadlines not, on the face of it, an ideal setting in which to make time for capability building. But that is exactly what companies should do if they are to achieve (or even exceed) their valuecreation goals. However experienced at M&A they may be, and however successful as separate entities, integration will still require dedication, effort, and knowledge. Nor does it end a few months after the deal is signed, but lasts as long as it takes to get the two companies truly operating as one. However, the payoff for learning how to manage integration effectively will be enormous. Indeed, our research shows that it is one of the most significant contributors to the success of a merger and the long-term health of the new organization. 2 The financial crisis has prompted many companies to make fundamental changes in their organizational capabilities and business processes. It is clear that maintaining the status quo is no longer an option. Many experts predict that as financial pressures ease, we can expect to see a new wave of consolidation. 3 Capturing merger synergies will be one imperative, but not the only one. At a time when barriers to organizational change are relatively low, successful dealmakers have the opportunity to realize additional value. By leveraging the capability-building opportunity that a merger presents, they can emerge stronger and fitter than before. 1 Patrick Viguerie, Sven Smit, and Mehrdad Baghai, The Granularity of Growth: Making choices that drive enduring company performance, Marshall Cavendish and Cyan Communications, David G. Fubini, Colin Price, and Maurizio Zollo, The elusive art of postmerger management, The McKinsey Quarterly, November Goldman Sachs, A perfect storm for M&A, 16 October 2009.

3 2 What do I need to know? A merger piles extra pressures onto an organization and its leaders. Executives need to make more decisions, and make them faster. Investing time in capability-building activities may seem a luxury they can ill afford when they are struggling to maintain the momentum of the business through all the turmoil of merging. Yet capability building is vital: it enables the parties to a transaction to understand and combine their respective strengths, and acts as a platform for transforming organizations and the people in them. In our experience, companies that get it right recognize four key insights: Learning matters more than experience For companies engaged in a program of serial acquisition, investment in post-merger learning to build capabilities is critical. Having an institutionalized process for capturing and applying lessons learned from integration is a strong differentiator between competent acquirers and those that improve their capabilities over time. A McKinsey survey shows that an established process for systematically evaluating integration performance is the single most important distinguishing factor from more than 50 factors analyzed. 4 Perhaps surprisingly, a history of M&A activity does not in itself make a company better at integrating acquisitions. Experience, it turns out, is not a significant predictor of merger success but investment in learning processes, tools, and post-mortem analysis is. 5 Consider IBM, a prolific and successful acquirer. It has made substantial investments in developing the processes, skills, and resources to execute its acquisition strategy and can reshape them as needed to suit different deal types. In 2007, for instance, its software group deployed over 100 experts and specialized deal teams to drive value capture from 18 concurrent integration efforts. 6 The capabilities you need to build depend on the rationale for your merger Every merger is different, and the rationale behind a given transaction will shape the kind of work an organization needs to do to improve capabilities both during and after the integration. During Steve Kaufman s tenure as CEO of Arrow Electronics from 1986 to 2000, the company developed capabilities that allowed it to assimilate target companies at a highly accelerated rate a valuable asset in a rapidly consolidating sector. However, when Arrow bought Anthem Electronics in 1994, it deliberately slowed the pace of 4 5 Maurizio Zollo and Harbir Singh, Deliberate learning in corporate acquisitions: Post-acquisition strategies and integration capability in US bank mergers, Strategic Management Journal, volume 25, Robert T. Uhlaner and Andrew S. West, Running a winning M&A shop, The McKinsey Quarterly, March 2008.

4 How do I build our capabilities during a merger to drive successful integration? 3 integration in order to preserve Anthem s talent and customers and accommodate its decentralized business model. Indeed, it held the target at arm s length for nearly three years until the merger could take place with minimal disruption to sales teams and customers. 7 This ability to recognize that a previously successful approach may not always be applicable is a valuable part of a company s learning. Naturally, some capability needs will be common to most M&A contexts. Investing in leadership development, project management, and communication skills, for instance, is likely to be of benefit in almost any integration process. You can t start too soon It is a mistake to wait until a deal is done before planning your capability-building agenda. The later you leave it, the busier everyone will be. The best time to begin is at the announcement or even earlier if possible. Any time you invest in early learning pays off later in the form of greater trust, more rapid progress toward alignment, and better preparation of tasks. As a board member at a leading European consumer goods company told us, If we hadn t spent so much time in the beginning understanding each other s passion, ambition, and way of working, alignment on the new strategy and organization structure would have taken significantly more time. Sometimes capability building is the key to creating value above and beyond the expected synergies from a merger. When it is critical to the success of the deal as a whole, it has to happen early on. In BAE s merger with Marconi, for instance, the level of operational overlap was so small that there was no way to derive all of the necessary synergies from traditional cost savings. To make up the shortfall, BAE used the integration as a catalyst to learn how to do things in a fundamentally different way by unfreezing the organization. CEO Mike Turner noted that You re using the opportunity of a merger to take best practice from outside and apply it. I reckon two-thirds of what we ve achieved in financial terms is from unfreezing, not from synergy. 8 Capability building should be factored into everything you do Integration is invariably a hectic time, so it is important that capability building does not become an added burden on top of all the other work involved. To avoid this, companies need to seize opportunities to incorporate learning into the integration activities they are performing in any case. At a chemicals company, the new top team attended regular workshops that focused on practical business decision making but were also designed to help members analyze their personal leadership styles and learn to work together efficiently. 7 8

5 4 Building capabilities always starts with your top team and leadership groups. Leading through the turbulence of a merger inevitably poses personal challenges: What will my future role be? How can I manage the uncertainty among my staff? How can I balance delivering synergies with keeping my people engaged and motivated? In response to such issues, one pharmaceutical company compiled a special training guide to help managers prepare for the difficult conversations they would need to hold in the weeks ahead. Techniques such as self-reflection, feedback, and coaching are often helpful for leaders developing their personal capabilities. For many companies, a merger or acquisition is not an exceptional event requiring one-off efforts but one transaction in a sequence of many. When inorganic growth is central to strategy, capturing and codifying insights from each integration helps build capabilities for the next. At 3Com, senior executives review the acquisition track record annually by comparing results achieved with the original assumptions used to justify the deals (rather than the targets set at the outset of the integration). This approach helps the company learn about its M&A strategy as a whole as well as its integration processes. When Wachovia merged with First Union, it hired a library-science specialist to document its highly successful integration program. Codifying the learning process in a formal way gave the integration teams a head start as well as helping the bank plan how to approach the enormous amount of work involved. As integration lead Steve Boehm noted, We think that documenting our approach and making sure it remains a living document saves weeks if not months of learning. 9 9

6 How do I build our capabilities during a merger to drive successful integration? 5 Contacts Americas Robert Rosiello Director Stamford office + 1 (203) rob_rosiello@mckinsey.com Europe, Middle East, and Africa Fabian Billing Principal Düsseldorf office +49 (211) fabian_billing@mckinsey.com Asia Pacific Hai Wu Principal Beijing office +86 (10) hai_wu@mckinsey.com

7 Organization Practice December 2009 Copyright McKinsey & Company